Option pricing in a regime-switching model using the fast Fourier transform

[摘要] This paper is concerned with fast Fourier transform (FFT) approach to option valuation,where the underlying asset price is governed by a regime-switching geometric Brownian motion. An FFTmethod for the regime-switching model is developed first. Aiming at reducing computational complexity, a near-optimal FFT scheme is proposed when the modulating Markov chain has a large state space.To test the FFT method,a novel semi-Monte Carlosimulation algorithm is developed.This method takes advantage of the observation that the option valuefor a given sample path of the underlying Markov chain can be calculated using theBlack-Scholes formula. Finally, numericalresults are reported.

[学科分类] 应用数学